The Budget's impact on markets

July 20, 2009 13:00 IST

The Budget did little more than tinker with a few tax rates and revisit the fiscal deficit.

Frankly, given the way government works, there wasn't time to do more. However, disappointment ran deep because the Economic Survey listed a whole slew of reforms and investors were hoping against hope that some of that spirit would be reflected in Budgetary provisions.

The post Budget correction has pulled values back to the levels of mid-May, before the election results were announced. That in itself, is a thumbs-down for the new government. However, new downgrades on the deficit and the GDP projections make the correction look rational.

Valuations still remain high. At 4300-odd, the Nifty is trading at a PE of 20, which is difficult to justify on the basis of expectations of 2009-10 growth, or for that matter on the basis of interest rates or any other fundamental criteria.

A host of industries, which were expecting sops, have been disappointed. Housing and real estate for instance, don't get increased tax-breaks for borrowers. The MAT jugglery has been factored into earnings estimates with downgrades for MAT-payers. Energy doesn't get the petro-product decontrols it was hoping for.

However, the Budget contained a couple of interesting indicators. One is the assumption that at least Rs 35,000 crore (Rs 350 billion) is coming in on 3G auctions in this fiscal since that provision is made in the non-tax revenue estimates. The floor for 3G auction proceeds has now been raised to Rs 40,000 crore (Rs 400 billion). Seven operators (six of them private) will get licenses.

If this does happen, it changes the dynamics of the telecom industry. The sector is mired in an unholy legal tangle. If there is commitment from the very top that 3G must be launched this year, there is some chance of sorting out the mess. There is no way that Rs 40,000 crore will arrive otherwise.

Another interesting point is that the government hasn't made any projections on the disinvestment front  it normally doesn't. But the deficit makes speed on that front imperative. NHPC is apparently planning an IPO, other PSUs will also be looking for go-aheads to tap the market.

While each issue as and when it appears, would have to be treated case-by-case for investment purposes, this could help revive the primary market. Cynics would also benefit from an increased PSU focus by investing in already-listed PSU stocks since these are likely to benefit from association if their peers are being listed.

The lack of projections here is understandable. The primary market has been dead since the Reliance Power issue. It's anybody's guess how fast it could revive  given the way the Indian IPO market is structured, a new listing is impossible without better sentiment on the part of individual investors.

Apart from assumed 3G revenues, other Budget estimates are conservative. Roughly 15 per cent increase in corporate tax revenues is estimated, and personal IT revenues are actually estimated as likely to be lower than in 2008-09. Service tax estimates are flat. It's likely that personal IT and service tax will generate serious surpluses. There's also a fair chance the corporate tax estimates will be exceeded.

So, coupled to tax revenue expansion, if there is a significant disinvestment drive and larger proceeds on the 3G front, the deficit may actually be less than the projected 6.8 per cent. Of course, this ignores deficits in various states and it excludes losses suffered on the energy-subsidy front due to "under-recoveries" from the sale of kerosene, gas, diesel, etc.

Another thing that stands out is the increased focus on road-building. Apart from higher allocations and a new refinance mechanism, the NHAI has also been told to speed up contract awards and Minister in charge has promised improve performance by factors of five or more. This could mean major breakouts for engineering and construction outfits and for those players, who get into road operation and maintenance.

The new refinancing model for highway projects should mean larger business volumes for PSU banks and if the take-out model works, it addresses asset-liability mismatch. But there are two reasons why banks are reluctant to enter infrastructure.

One is certainly problems with long tenures, the other is lack of risk-assessment expertise. The latter would also need to be addressed before investors felt comfortable.